Bookkeeping
Double entry and the accounting equation
Bookkeeping records transactions so that the accounting equation (assets = liabilities + equity) always holds. Every transaction has equal debits and credits. Debits increase assets and expenses; credits increase liabilities, equity, and income. The trial balance proves arithmetic equality but not correctness, so errors of principle, omission, and compensating errors can survive it.
Core records
Know the books of prime entry: sales day book, purchase day book, cash book, petty cash book, and journal. The journal handles adjustments, corrections, and non-routine entries. The general ledger collects the accounts; the sales and purchase ledgers are memorandum records supporting receivables and payables, reconciled to control accounts.
Traps in questions
- Bank reconciliation: deposits in transit and unpresented cheques are timing differences, not errors. Adjust the cash book only for items the bank already recorded (charges, interest, standing orders).
- Suspense accounts arise when a trial balance does not balance; the difference sits there pending investigation, and it must be cleared before final accounts.
- Accruals and prepayments match income and expense to the period, not to the cash movement.
- Capital versus revenue: buying a delivery van is capital; its fuel is revenue expenditure.
Worked rule of thumb
A supplier invoice for goods is received. Debit purchases (or inventory), credit payables. When paid, debit payables, credit bank. If the invoice includes a discount, record the net amount only if the discount is taken at source; otherwise record the gross and credit the discount received when applied. Always ask: which two accounts move, and in which direction?
Keep the distinction between the cash book (a book of prime entry and a ledger account) and the bank statement (an external record) clear, because examiners exploit it.